Unintended Consequences: Golf Course Edition

Admittedly, this story has very little to do with personal finance. Sorry about that, but not really. I’m also not 100% sure it’s true, since all the info I have on it is second-hand. I trust my “sources” on this, but haven’t done any of the work to verify. Yes, kids, I’m even a lazy investigative reporter.

Still, I think it’s a fascinating tale with a lot of fun lessons about unintended consequences. Which, to be frank, are easily the best consequences. It’s not even close, either.

The year was 1996, and my local golf course had big expansion plans.

Located on the edge of town, the course featured a nine-hole track with plenty of trees along the river. It was a standard par 36 course, playing a little over 3,000 yards from the middle tees. Like many local courses in Alberta, it was publicly owned but was managed by a board of directors. The board then set policy, hired a manager, and so on.

There were a few problems with only having a nine-hole course, however. It struggled to attract big tournaments, simply because they all play on 18-hole courses. Tourists were avoiding the place for the same reason. And, of course, having a back nine would allow the course to sell more 18-hole rounds. More people would cough up the extra cash to play 18 unique holes versus the same nine holes twice.

There was just one problem. The course is nestled between a highway and a river. It’s bordered by houses on one side and a farm on the other. Even if the farmer was willing to sell (he wasn’t), the land was too flat and boring to make a good location for nine more holes. And buying out homeowners was impossible.

There was a multitude of undeveloped land just across the highway, but it was hilly terrain filled with coulees, ravines, and more cacti than the set of a Hollywood western. This land would be expensive to develop and would create a golfing experience vastly different than the existing real estate.

Despite the obvious reasons against choosing this land, the board went ahead and did it anyway. And to their credit, the result was spectacular. The back nine is a wonderfully unique experience. It might be the hardest nine holes in the province (I once lost 10 balls in nine holes), but it’s unlike anything else out there. Each hole presents a different challenge. Some demand length to carry your ball over a ravine. Others require precision to place your ball in a narrow, sloping fairway. And one particularly nasty hole requires a 190 yard carry over a water hazard and bunker to a narrow green.

The problem wasn’t with the back nine itself, which worked out quite nicely. The problem was how it was paid for.

Here’s the unintended consequences part

Building nine new holes in terrain not suited for holding a golf course was expensive. The price tag quickly ballooned into something worth several million dollars.

To pay for the expansion, the board of directors tapped multiple sources, including going to the local community with a unique offer. The golf course would sell two tiers of lifetime memberships. The first, which cost $10,000, would be good for one individual to golf as much as they wanted. The second, which cost $25,000, would let a business owner and a number of their employees golf for free. Avid golfers snatched up the deals, and the course ended up selling dozens of each kind of memberships.

Fast forward 20 years, and the establishment was beginning to have some serious money problems. Despite increasing rates annually and a book filled with tee times, the top line just wasn’t budging. After bringing in an outside consultant to crunch the numbers, it was obvious what the problem was. Some 60% of rounds were played by individuals using these lifetime memberships.

Here’s what happened. Most avid golfers snatched up these lifetime memberships like your author scarfing down Doritos. Casual players were then driven away by the increasing costs on a per round basis, the general decline in the sport’s popularity, and an unwillingness to play the incredibly difficult back nine. Sure, some tourists came to play the venue, but those numbers are steadily falling as well. It turns out fewer and fewer people are golfing these days.

The board faced an interesting conundrum at this point. The wording in the lifetime memberships was ironclad; there was only one way to get away from the commitment, which would be to declare bankruptcy and start over again under a new organization. But it’s not quite that simple, since the place wasn’t necessarily insolvent.

Certain lifetime members also reacted in a predictable way. Once word got out the board of directors were looking for ways to end the gravy train, they put themselves up for nomination. I’m told the board is now mostly filled with these people.

The moral of the story

If I had a time machine, one of the first places I’d go is back to those board meetings in the mid-1990s to see if anyone foresaw this coming. Yes, I am that lame.

The lesson is simple. Beware of the long-term unintended consequences of today’s actions. This is often easier said than done, of course. Second-level thinking is hard but is often necessary.

4 Comments

RICARDO
on March 7, 2018 at 6:50 am

Well at least Tiger seems to like it!

The idea for lifetime membership was an easy way to raise cash. The problem was to not limiting the number of memberships available.
The following are my very simple minded cyphering.
4 starts per hour
12 hour day (maybe longer in Alberta summers) = 48 starts per day
7 days (at least at last count) per week = 336 starts per week (more or less)
So selling 48 lifers wouldn’t be so bad because, believe it or not, not everyone plays every day. Or even every week.
Selling 336 lifers starts to get tricky on slots available. After all it only takes 15% of your lifers to fill up a day. Still not so bad and manageable because again not everyone plays every day. Although those lifers probably only have their balls on their minds. You are now getting in to how many lifers are going to want to play on any given day and how much space is available for derelicts passing through or the other impoverished town folk who were too dumb witted to see what all these lifers being sold would mean.
Basically you will end up with a private golf club as the lifers have taken over and will be responsible for upkeep and maintenance. But what the hell. With all those petro dollars, back then, that was no problem.
My friend paid $25K membership to join then I forget how much a year plus minimum (use it or pay) $2K dinner/bar bill. Not at the above place but it gives you a good idea how much these lifers thing of their balls.
Not my bag of beans but to each their own.

Interesting, I was thinking of something like this the other day. Playboy sold lifetime magazine subscriptions in their early days, and it did work out for them. They honoured their “lifers” right up to the end of printing, but I’m not sure how it worked out now that they’re all-digital.

It seems like a really bad idea to sell to a local business. The golf course has to assume that most employees won’t care, but there will be a few who will use that pass to the fullest, so every local-business pass you sell will result in people booking every day. Also how would that pass expire, would the local Walmart have to close down?

Personally if I were in charge I would focus on the non-golf parts of the business. Can they expand the clubhouse and push into catering more weddings and events? Can they expand the bar into a full-service restaurant, and bring in more dino-tourists? I think the best bet is to wait for the lifetime members to die off while focusing on the other parts of the business.

I remember years ago you joked in one of the comments that you would do an article on tontines. It was just an offhand Simpsons reference, but these lifetime memberships are effectively tontines. At least with golf and Playboy you have few people buying memberships for their kids, so there’s an upper bound on the obligation to the customer.

Another excellent article Nelson. My firm took over an insolvent golf course a couple of years ago and ran it until we sold it off. The problem with that golf course was not lifetime memberships but rather, lazy management. Rather than advertising and promoting the facility, they just threw every tee time onto a discount website.

So for every round of golf played, the course lost money. Eventually, tournaments could not pay for the management error and the golf course went into receivership. A very similar tale to your story. It is only a matter of time until your golf club is insolvent, and then they can file for bankruptcy and emerge free from the past lifetime memberships.

The challenge for the new ownership group will be to rebuild the lost goodwill!

People seem to always forget the mind-boggling behavior changes that come from a marginal cost of $0. I remember the debacle of American Airline’s early 80’s AAirpass, on which they’re still losing a ton of money today.

Next time a business is thinking of “free lifetime”, I think they should test the price at 10x what they’re thinking and then add some cost – it doesn’t have to be a lot, but definitely >0 – for each use. Long live microeconomics!